Month: December 2023 (Page 1 of 3)

One of the best traders, who publishes their trades.

Difficult to trade due to the time lapse in publishing

and as u can see below don’t even think about copying

the trades unless u have an extremely strong stop loss

policy,

U want to invest in the FTSE dividend shares but u do not have enough cash

to provide diversification , IUKD currently yields a variable 6%

so u get paid whilst u wait for the FTSE to recover, just in case

it doesn’t, for a long while.

No discounts to worry about, so you get all the growth in the ETF

straightaway.

Tradeable exactly as Investment Trusts.

There are only 3 stages of a chart.

Up Down Sideways.

You bought MRCH after the covid crash as it was in your watch list of

Dividend Hero’s.

The buying price was 350p and the yield was 8 percent.

When it reached it’s high of 600p, u would have received dividends of 75p achieving the holy grail of investing of being able to take out your stake and carry on receiving dividends on an investment that cost u nothing, zero, zilch.

Investing is all about timing and then time in.

Here you could have bought from the chart at 350p after it fell from

560p. The yield was 8 per cent, important as the price could have

carried on down.

Welcome to the 2023/24 Backwards and Forwards Zone

Are you finding yourself thinking about 2023 and 2024 in equal measure? If you are, fear not you are not alone. For chances are you’ve entered the BFZ – the Backwards and Forwards Zone. Confused? Have a read of the latest Doceo Insights and all will become clear…

ByFrank Buhagiar•28 Dec, 2023

It’s that time of the year again. No, not Christmas – although it is the festive season of course, it’s just not the topic for this piece. No, it’s also that time of the year when the baton is passed from the old year to the new. A time when commentators can find themselves afflicted by a temporary but nonetheless chronic condition – one that seemingly makes the victim look in diametrically opposed directions simultaneously, specifically back at the year drawing to an end/just gone and forwards to the one fast-approaching/just arrived. In short, they have entered the Backwards and Forwards Zone. London’s investment trust world is no exception. Neither is this commentator…

The Backwards bit

This year’s entry into the zone prompted, like last year, by the Association of Investment Companies (AIC) Investment company 2023 review, which was published with a couple of weeks to spare on 13 December 2023. The AIC’s roundup kicks off with the following:

“2023 has seen four mergers between investment companies, eight liquidations and eight investment companies change managers as boards responded to difficult market conditions and deep discounts, according to data from the Association of Investment Companies (AIC).”

“…difficult market conditions and deep discounts…” – 2023’s been a tough one for London’s investment company space.

The review continues: “There will be nine manager changes in total following the appointment of Asset Value Investors to manage MIGO Opportunities on 15 December – the largest number of manager changes in a year since 2009.”

Manager changes – a sign of challenging times? 2009 certainly was, courtesy of the Global Financial Crisis (GFC).

Back to the opening section of the AIC review: “The discount of the average investment company has remained in double figures through the whole of 2023, the only year this has happened since the financial crisis. The average investment company discount started the year at 11.7% and hit a post-2008 trough of 16.9% at the end of October before recovering to 11.1%…”

Another reference to the GFC – it was that tough.

One way to try to narrow steep discounts? Deploy buybacks. No surprise then that, according to the AIC, “It has been a record year for share buybacks, with £3.57bn of shares repurchased in the year to date, compared to £2.70bn during the whole of 2022, a 32% increase, according to statistics from Winterflood and Morningstar…”

Big jump in buybacks – a symptom then of a difficult year.

Other headline grabbers from the AIC review tell a similar story:

• Only two initial public offerings (IPOs) year to date…safe to say that tally won’t be added to between now and the end of the year – Ashoka WhiteOak Emerging Markets listed on the London Stock Exchange after raising £30.5 million; and Onward Opportunities listed on AIM in March, raising £12.8 million

• £1.1bn in secondary fundraisings (funds raised by existing investment companies) year to date, sharply lower than last year’s £5.2 billion

• £6.32bn dividends paid out by investment companies during the first 11 months of the year, a 14% increase on the previous year’s £5.55bn

• Total industry assets of £260 billion as at end of November, £5bn off the £265bn at the start of the year

• 26 investment companies altered their fee structures. According to the AIC: “The most common type of fee change was a reduction in a company’s base fee (11 companies) and the second most common was a reduction in a tiered fee (10 companies). In addition, 7 companies introduced tiered fees for the first time and two companies removed their performance fees…”

All in all, the passing of 2023 unlikely to be mourned by London’s investment companies.

The Inbetween bit

Several interesting threads among the various stats in the AIC Review to pick up on: how the steep discounts peaked in October and then narrowed; the high level of mergers and liquidations; 26 companies lowering their fees. Each worthy of a closer look:

Post-October narrowing of discount rates – as previously reported in Doceo Insights Was it all down to the commentator’s curse?, the post-October narrowing in discounts coincided with a drop in bond yields. Hardly a surprise. In the above Doceo Insights, the finger of blame for those wide discounts in the first place was largely pointed at…higher bond yields: ‘Winterflood’s Emma Bird, as quoted by interactive investor back in September 2023, singles out higher bond yields: “Government bonds now offer a meaningful yield for the first time in many years, which has led to significant equity outflows in order to support growing fixed-income asset allocations. Furthermore, asset classes such as infrastructure and property have been hit particularly hard, as investors anticipated a fall in net asset values due to the impact of rising discount rates and an increased cost of debt, while share prices also fell as the yield pick-up versus UK gilts narrowed, making the trusts look relatively less attractive.”’

It follows then that were those bond yields to fall, then those wide discounts would likely shrink too. As the same Doceo Insights article noted: ‘…the week ended Friday 3 November 2023 saw a significant downwards move in bond yields…10-year US Treasuries ended the week around the 4.5-4.6% level. Significant daylight then between those levels and the 5% mark that had been prevalent for much of October, a month that saw more and more investment companies caught up in the discount doldrums.’ Cue a reduction in the number of investment companies trading at 52-week high discounts: ‘…41 trusts trading at 52-week high discounts over the course of the week ended 3 November 2023, is already 15 fewer than the previous week’s 56.’

Not all down to bond yields though. Other dynamics were highlighted by Winterflood’s Ms Bird too. Back to the above Doceo Insights: ‘According to Ms Bird, the discount widening seen “…is likely caused by a number of factors, including: some investors favouring fixed income over equities, institutional investors experiencing outflows from their own funds, retail and institutional investors awaiting more macroeconomic certainty before (re-)entering the market, and concerns over the perceived costs of investment trusts in light of cost disclosure rules, particularly following the publication of Investment Association guidance last year.’

The high level of mergers and liquidations – brings to mind another Doceo Insights piece Two mergers, one wind down and a sprinkling of gold dust which was centred around broker Winterflood’s list of Potentially Sub-scale Funds, a list that, at the time of writing, had successfully predicted “Two mergers, one wind down, one potential wind up – four (potential) servings of corporate activity across the combined 13-strong watch list. Quite some return. And that’s just after a little over six months. Winterflood’s Sub-scale Watch List – one to watch…”.

Now, when putting together the list, ‘The broker looked for common themes from the various deals that had been announced in the run up to May 2023, particularly those involving funds deemed to be sub-scale. As Winterflood writes: “…three key themes emerge. Each can be used as a lens for assessing which trusts in the universe may currently fit the definition of sub-scale, and hence may be susceptible to upcoming corporate action.’ With nine more names on the list, who’s to say Winterflood won’t add to its score?

The high level of mergers and liquidations, yet another sign of a challenging 2023, but also evidence that the investment company space is putting its house in order – smallish funds are looking to merge to achieve scale and become more attractive to investors; and trusts are electing to wind themselves up and return capital to shareholders, capital which could be reinvested elsewhere in the sector.

26 companies have lowered their fees – what about Ms Bird’s ‘concerns over the perceived costs of investment trusts in light of cost disclosure rules…’? Over to broker Numis for a quick recap: “The cost disclosure issue centres around the fact that there is a single cost number in the KID document which is used by investors, such as private wealth managers and multi-asset/manager funds, and aggregated into their own cost disclosures to their underlying clients. As a result, Investment Companies look expensive in a portfolio versus direct equities…” In short, not a level playing field for investment companies which are made to look more expensive than other vehicles.

Here, there have been definite signs of movement – cost disclosure rules were recently debated in Parliament and are seemingly on the government/regulator to-do-list. A start at least. If the result is a more level playing field in terms of cost disclosure, then according to Numis this “would give much greater scope for a range of investors to increase exposure to the Investment Companies sector or return after exiting their positions.” One to keep an eye on then, but with 26 fee rates effectively lowered during the year, investment companies are already helping themselves on the cost front.

Tailwinds provided by lower bond yields; investment companies taking action to make themselves more appealing to investors either by increasing their scale or lowering their fees; funds winding down and returning capital to investors – all brings us on to…

The Forwards bit

For it’s just possible that these positive developments/trends will persist and, in the process, help lay the foundations for a much better year for London’s investment companies. Cue forwards-looking commentary from investment company investor MIGO Opportunities (MIGO) extracted from the fund’s recently published Half-year Report. As investment manager Nick Greenwood writes in his Review:

“We have heard the death knell sounded for investment trusts many times before. The sector has always evolved and progressed.” The fund manager goes on to explain that: “There are self-help measures which can be adopted. Oversupply can be dealt with via buy backs. The law of natural selection is alive and well in the world of closed end funds and we expect to see the recent trend of mergers and wind downs to continue. There are new audiences to focus on, such as self-directed investors and newer wealth management businesses often staffed by individuals who have departed the vast chains. Despite experimental capital structures being mooted, the closed-end fund is the best structure for accessing illiquid asset classes. The travails of open-ended property funds sum up the challenges and explain why investment trusts will continue to exist.”

The fund manager continues: “In recent weeks the outlook has brightened as expectations of further interest rate rises have petered out. Investors will now anticipate their eventual decline. Many investment trust share prices are languishing at levels which generate attractive yields for investors buying today. Should interest rates actually fall, this attraction will grow further. In the medium term such wide discounts are unsustainable as, if the market fails to properly value closed ended funds for structural reasons, then the real world will claim the underlying assets on the cheap albeit at higher levels than today. Furthermore, should there prove to be a sensible reform of the cost disclosure regime, we should expect trust share prices to rally sharply as investors who have been forced onto the sidelines are allowed to return to the market.”

Before concluding with: “Generally speaking, when discounts have become very wide trust investors have then benefitted from the powerful combination of rising net asset values and narrowing discounts. Given the widespread opportunities to exploit mis pricings, our cash position steadily declined during the period under review and has continued to decline since.” MIGO putting its money where its mouth is.

“The thing is potentially the tailwinds behind the investment trust sector are quite substantial…markets seem more confident, the (FED) pivot is certainly happening in America (and) may happen in the UK as well…So you’ve got potentially declining interest rates (and) cash becoming less exciting.” The same goes for bonds. As David points out: “There’s lots of people who are saying that although fixed income is more interesting, most of the gains have already been made…because you’ve already seen the yields drop down.” And then there are specific features of investment trusts to consider too: “You might see leverage coming in to play i.e. gearing…and that active overlay which should be providing above benchmark returns. That could all be a very strong tailwind behind the investment trust sector…You could move from quite substantial discounts…to quite positive numbers…and that geared return of discounts tightening and the underlying markets doing quite well could be a really powerful tailwind.”

Reaching for the stars

At least two commentators then thinking that with lashings of fair winds and following seas, the stars could well be aligning for a much better year for London’s investment company space (all written with fingers well and truly crossed). But ho ho ho! Enough of looking backwards and forwards (for now at least). Time to focus on the here and now. That means there can be only one more thing left to say:

HERE’S TO A HAPPY AND PROSPEROUS NEW YEAR FOR ALL FROM THE TEAM AT DOCEO.

Funds on the Watch List this week include: SMT, SLFR, AUGM, CRS, RTW, BSRT, LMP, LXI, ORIT, AERI, MVI, INPP, EGL, BRIG, PRSR, MRCH

Welcome to this week’s Watch List where you’ll find golden nuggets on trust discounts, dividends, tips and lots more…

ByFrank Buhagiar•27 Dec, 2023•

BARGAIN BASEMENT

Discount Watch: six

Our estimate of the number of investment companies whose discounts hit 12-month highs over the course of the week ended Friday 22 December 2023 – eight less than the previous week’s 14.

Three of the six were on the list last week: Digital 9 Infrastructure (DGI9) from infrastructure; NB Distressed Debt (NBDD) from debt; and Tufton Oceanic Assets (SHIP) from leasing.

That leaves three new names: JPMorgan Japanese (JFJ) from Japan; International Biotechnology (IBT) from healthcare; and Third Point Investors (TPOU) from hedge funds.

ON THE MOVE

Monthly Mover Watch: No change

At the top of Winterflood’s list of monthly movers in the investment company space. That means SLF Realisation Fund (SLFR) takes the Christmas number one spot thanks to a monthly gain of 48.2%. The shares have been in buoyant mood ever since November’s announcement that the fund would “…return an amount of 1.5 pence per share to Ordinary Shareholders, being £5.3m based on the current number of shares in issue…by way of an issue of redeemable B shares…”

In second, Augmentum Fintech (AUGM) which moves up from fourth after its share price gain on the month increased to 27.3% from 17.5%. Still no material news out from the fintech investor since those well-received half-year numbers at end of November.

Three new names in the final top-five slots. In third with a gain of 20.6%, Crystal Amber (CRS). Shares have been on the up ever since the company announced a share buyback programme in early December. RTW Biotech (RTW), another fund that has been buying back its shares this month – a 19.9% monthly gain enough to take fourth place. That leaves Baker Steel Resources (BSRT) in fifth having risen 15.9% over the last month. No material news out so put that one down to the fabled Santa Rally?

Scottish Mortgage Watch: +9.1%

The monthly share price gain at Scottish Mortgage (SMT) as at Friday 22 December 2023, an increase on last week’s +7.7%. Similar story with NAV – up 4.5% compared to 3.9%. And with the wider global IT sector – the monthly gain increased to 4.3% having previously been up +4.0%.

THE CORPORATE BOX

Combination Watch#1: LondonMetric Property (LMP) & LXI (LXI)

Confirmed “…that they are in discussions regarding a possible all-share merger of the two companies, pursuant to which LondonMetric would acquire the entire issued and to be issued ordinary share capital of LXi (the ‘Possible Merger’)…The Possible Merger would result in…A UK-focused triple net lease REIT of scale with a pro forma gross asset value of approximately £6.4 billion and market capitalisation of approximately £3.9 billion which is expected to provide improved share liquidity and better access to capital…” Furthermore, the new entity would have a “…combined portfolio aligned to structurally supported sectors (with approximately 93% exposure to the logistics, healthcare, convenience, entertainment and leisure sectors)…”

Combination Watch#2: Octopus Renewables Infrastructure (ORIT)

Announced proposals to combine with Aquila European Renewables (AERI): “The Board of ORIT believes there is now a compelling logic to create one of the largest LSE listed diversified renewable energy investment trusts, through the combination of ORIT and…AERI…If heads of terms are agreed with AERI, implementation of the Proposed Combination through the Section 110 Scheme would require approval by each company’s shareholders, resulting in the voluntary liquidation of AERI and the rollover of its assets into ORIT in exchange for the issue of new shares of ORIT to holders of AERI shares. Octopus Energy Generation will act as the investment manager to the enlarged company.”

Comment from Jefferies: “On the face of it, this looks to be a sensible transaction, resolving AERI’s future as a second continuation vote is due to occur in September, while the portfolios are complementary with little overlap and AERI’s lower gearing level that would reduce ORIT’s leverage post completion. One potential impediment we can see, however, is that AERI holds minority stakes in some projects…with other Aquila funds holding the majority, meaning ORIT would not have full control of the acquired portfolio.”

Insider Watch: Marwyn Value Investors (MVI)

Revealed “that Samantha Corsellis, wife of James Corsellis (partner of Marwyn Investment Management LLP, the manager of the Company), purchased 300,000 Ordinary Shares in the Company at a price of 78 pence per share on 18 December 2023…the aggregate shareholding of James Corsellis and his PCA’s…is 6,028,311 Ordinary Shares, representing approximately 10.66% of the Company’s voting rights.”

Buyback Watch: £30 million

The size of International Public Partnerships’ (INPP) proposed buyback programme: “The Company has previously stated that once it has fully repaid the cash drawings under its CDF, it would be in a position to consider further measures designed to reduce the discount to the NAV at which the Company’s shares are trading. Given the anticipated full repayment of the CDF in January 2024 and the Board’s continued belief that the current share price materially undervalues the Company…the Board intends to commence a share buyback programme of up to £30 million in early 2024.”

Dividend Watch: 4.7%

The current yield at Ecofin Global Utilities and Infrastructure (EGL): “The Company’s revenue return per share increased by 9.2% year-over-year as a result of continuing strong growth in investment income even though higher rates increased borrowing costs. Due to this, and to reflect your board’s confidence in the growth prospects of EGL, we have decided to increase the quarterly dividend to 2.05p per share (8.20p per annum)…At the current share price and increased dividend rate, the Company’s shares yield 4.7%.”

4.2% – BlackRock Income and Growth’s (BRIG) yield based on the proposed full-year dividend and year-end share price: “The Board is…proposing a final dividend per share of 4.80 pence (2022: 4.70 pence) giving total dividends for the year of 7.40 pence per share…resulting in a yield of 4.2% based on a share price of 178.00 pence as at 31 October 2023.”

MEDIA CITY

Tip Watch#1: PRS REIT (PRSR)

The subject of Questor article, This property trust has bucked the trend of falling valuations but still trades at a big discount. As The Telegraph’s tipster notes “Professional investors are topping up their holdings in PRS real estate investment trust (REIT) as Britain’s biggest developer of family rental homes appears finally to be on the verge of making enough profits to cover its dividend.” Among the buyers mentioned: PRSR Chairman Stephen Smith who recently snapped up £29,000 of stock; and “Waverton, a London-based fund manager that buys investment trusts to give its clients access to specialist areas…increased its stake…to 5.9pc. Its £26.4m holding makes it the Reit’s third largest shareholder behind fund groups Invesco and Aviva.”

Questor goes on to point out that the shares have “rallied by 25pc in the past two months to 82.9p, although they remain below a peak of 114p in April last year…” Why the rally? “The stock has been buoyed recently by hopes that interest rates will fall next year, relieving some of the pressure on its finances and on property valuations.” Those finances are also getting a helping hand from the trust’s “significant scale” as well as “…strong rental growth thanks to the national shortage of affordable homes…By Sept 30 the number of completed homes had grown to 5129…”

Still some way to go until earnings cover dividends though. And “The uncovered dividend is one reason why shares in PRS, which Questor last tipped at 83.3p in October last year, stand 31pc below Numis Securities’ estimated NAV per share of 119.7p.” However, “The discount has narrowed from 45pc two months ago, when Numis analysts Andrew Rees said the valuation looked ‘undemanding given the compelling sectoral tailwinds.’ That’s an assessment with which we still agree. The trust performs a social good as well as offering a potentially decent return from this low level. The shares should climb when dividend cover is restored and the weight of higher borrowing costs eases further. Hold.”

Tip Watch#2: Don’t dismiss this ‘expensive’ investment trust. It offers excellent value for money

The title of a Questor Column article published a week or two back. The trust not to be dismissed is UK equity income investor Merchants Trust (MRCH). Why would anyone dismiss MRCH? Because unlike many trusts, MRCH doesn’t trade at a yawning discount to net assets. Not enough of a reason to be overlooked for, as Questor points out, “…trusts that trade at narrow discounts or even at modest premiums are also attractive when their records are taken into account…For example, Merchants currently trades at a 0.2pc premium to net asset value but has generated a 48pc total return over the past five years. This is more than twice the 19pc total return of its peer group…”

What’s more: “…recent performance is particularly impressive in view of its focus on British stocks at a time when they are unpopular with investors.” This could well turn into a tailwind as “…the prospects for the economy are widely forecast to improve as inflation falls to the 2pc target and interest rate cuts begin, the outlook for its holdings is likely to strengthen materially.”

And Merchants is not just about capital growth. Income is also very much part of the investment case: “the trust’s dividends have risen uninterruptedly for the past 41 years…Such reliability, tied with the prospects for future growth, gives the trust strong income appeal, not least because the dividend yield is already 5.3pc at the current share price…while there are far cheaper trusts available through which to take advantage of any upturn in British shares, Merchants’ impressive record, sound strategy and income potential make it worthy of its relatively high valuation. It therefore remains an excellent purchase for new investors.”

DOCEO

Anyone who has owned Fundsmith since 2021 has added at least

2 years to their retirement date. It hasn’t effected it’s popularity

though.

In general above the cloud the sun is shining and below

it’s raining on your parade. You do need a price percentage

figure to trade the reversal

It’s a dangerous time to be buying Investment Trusts especially those

that have risen from their lows in a short period of time.

(see watch list below).

If u buy the yield u should be prepared for the long haul

as prices may fall from here next year.

Of course if u are re-investing earned dividends that’s a positive

as u get more shares for your hard earned and a better yield.

As always DYOR, e.g. the yield for RGL is wrong as they recently

trimmed their dividend.